Regulatory Sandbox for Startups

Startups are disruptive by nature, and policymakers all over the world are scrambling to keep up with their relentless development. This failure to catch up with emerging technologies has resulted in some dramatic deadlocks, such as the much-publicized rift between Uber and the Land Transportation and Franchising Regulatory Board (LTFRB).1

After flouting driver accreditation rules, Uber was meted out a one month suspension and had to cough up a hefty Php190M fine to lift said suspension. The dispute was met with public outrage from Uber’s inconvenienced users,2 illustrating just how important startups have become in today’s world.

Uber is just the tip of the iceberg. More and more startups are steadily expanding into previously niched businesses, presenting a conundrum for regulators. This is where regulatory sandboxes come in handy–this innovative approach to policymaking allows innovators to test their business models without the need to comply with certain legal requirements, subject to predefined restrictions.3

A balancing act

A regulatory sandbox allows innovation to flourish and prevents startups from being stifled by old laws. It is not deregulation per se–rather, it is an approach which prioritizes cooperation between an entrepreneur and a regulator.4 A regulatory sandbox establishes a “safe space” wherein entrepreneurs can test innovative products, services, business models and delivery mechanisms with the support of regulators. The sandbox is intended to test new solutions in real life situations where potential consumer or user needs must be demonstrated while at the same time managing potential legal risks.5

A regulatory sandbox mitigates overall risk because it allows real-time impact analysis. This, in turn, ensures that the innovation or new technology will not endanger the safety of users and imperil the robustness of a sensitive sector, such as financial services and transport.

With its test-and-learn approach, a regulatory sandbox minimizes legal uncertainty and improves startups’ access to investment. This kind of cooperation becomes more important given the fact that new technologies blur the lines between regulated and unregulated services, and keeping regulations effective steadily becomes harder as more new entrants flood the market. In short, this flexible approach allows regulators to mitigate risks while remaining open to innovations.6

Regulatory sandboxes have already been established in several jurisdictions, particularly the United Kingdom,7 Singapore,8 Malaysia,9 Australia,10 and the United Arab Emirates.11 As a result, startups have flocked to these countries and they have been supported by regulators and big-name investors.12 This has also resulted in an influx of global talent, particularly young people and entrepreneurs.

Can startups thrive in the Philippines?

Local regulators are now catching up to this trend. In February 2017, the Bangko Sentral ng Pilipinas (BSP) issued Circular #944, which allows Virtual Currency (VC) systems such as Bitcoin to be registered locally. The BSP “recognizes that Virtual Currency (VC) systems have the potential to revolutionize delivery of financial services and may further support financial inclusion” however, it “does not intend to endorse any VC, such as Bitcoin, as a currency since it is neither issued or guaranteed by a central bank nor backed by any commodity. Rather, the BSP aims to regulate VCs when used for delivery of financial services, particularly, for payments and remittances, which have material impact on anti-money laundering (AML) and combating the financing of terrorism (CFT), consumer protection and financial stability”.13

Meanwhile, the Department of Information and Communications Technology (DICT) has launched a Philippine Roadmap for Digital Startups, which is a short- and long-term strategic plan geared towards developing internet-related innovation in the country. It provides clear goals and benchmarks and recommends areas of focus and future improvement. It also enumerates the short- and long-term recommendations for all stakeholders to improve the Philippine internet-related startup ecosystem.14

Currently, most local startups are in their early stage or seed stage and only a few startups have made their exit. The DICT aims to have more startups clinch Series A funding by 2018. Beyond 2018, it is projected that there should be more startups that have successfully existed in the ecosystem. In the long run, the roadmap’s main goal is to produce the next billion-dollar tech startup from the Philippines. Benchmarked in 2020, the roadmap project’s long-term agenda is to have an inventory of 500 Philippine startups with a total funding of at least USD200 Million and a cumulative valuation of USD2 Billion.15

The Philippine start-up ecosystem has a long way to go before it can match the success of its neighbors. Nevertheless, the government’s increasing acceptance of the fact that regulations need to be adjusted to accommodate innovators is indeed a promising start. Cooperation is key in order for startups to thrive and it appears that the Philippines is finally on the right track.

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This blog is the embodiment of a vision we have at Disini & Disini (D&D) of an IT empowered citizenry where we, as a people, harness information available through the internet to bridge the gaps where there may be lapses. As part of our advocacy, we take full advantage of the accessibility of cyberspace by developing this blog.